Verasun, Other Ethanol Producers May Face Overwhelming Odds

(MoneyWatch)  The body blows just keep coming at the nation's ethanol producers, among them big names like Verasun, Pacific Ethanol and Aventine Renewable Energy Holdings.

Like everyone else, ethanol makers have been hit by the recession's broad problems, including tight credit. But a side-effect of the falling economy, falling gas prices, has had a much worse effect on the alternative fuel business. Ethanol prices follow the price of gas, so producer's tightening margins have forced many to idle existing plants and delay construction on new ones. Ethanol Producer just published a list of the facilities and companies involved, including some unnamed above, like Husker Ag and Suncor Energy.

But while pump prices are continuing to decline, a new challenge has unexpectedly appeared: Rising corn prices. The Wall Street Journal says experts are unsure of the reason why, but the feedstock, used to make ethanol, has gone up over a dollar since December, a rise of more than a third.

Corn may fall back to its old levels, but if it doesn't, or does so slowly, the ethanol industry will face desperate times. One of the industry's last remaining hopes is that President-elect Barack Obama, scheduled to take office Jan. 21, will direct a large portion of a $25 billion renewable energy stimulus to prop up ethanol. Obama is likely to support ethanol, the reasoning goes, because he's from Illinois, a corn-producing state.

However, those hopes may be unfounded. Other renewable sectors like wind and solar are also suffering, while efficiency projects and transmission capacity upgrades are likely to take a large piece of the pie. The auto industry is also clamoring for help, and might receive some funds from the energy package. And ethanol is not nearly as popular as it was a few years ago.

So prospects going into the first half of 2009 look bleak for these companies. Being in bankrupt Verasun's position is unenviable; with no idea of when ethanol will be a profitable product again, lenders are unlikely to help the company any more than they have to. Stronger companies like Aventine still face a tough road.

In the long run, though, the crunch is likely to be a positive for the industry. Plants that were built with credit during the ethanol rush will go to buyers capable of operating them with lower margins. Today's energy companies likely include the shrewd bettors that will profit from the collapse of their rivals. For now, all they may need to do is survive.